VERTICAL INTEGRATION AND THE STRATEGIC USE OF PRIVATE INFORMATION.

This study presents a model of bilateral monopoly in which one of the agents prossesses private information about actual production costs. The strategic disclosure of this information is used as a bargaining tactic in an attempt to appropriate the quasi rents resulting from production. An examination is made of the market transactions costs associated with the strategic use of private information. Vertical integration restructures private incentives so that the strategic use of information is minimized, thereby resulting in increased efficiency of production.